Industry hits out at life report

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A mooted cap on upfront life insurance commissions will send small independent financial advice firms out of business, according to a number of industry stakeholders.

The recently released Life Insurance and Advice Working Group (LIAWG) report argued that it was critical to restructure financial adviser remuneration.

Author John Trowbridge proposed introducing a new industry-wide model that capped commissions at 20% of premiums, supplemented with an Initial Advice Payment (IAP) of $1200, to be paid when the client first takes out cover and no more than every five years afterward.

Setting the IAP at $1,200 is intended to make a contribution to cost recovery for advisers while falling short of full cost recovery, which is variously estimated at between about $1,500 and $3,500 per client,” Trowbridge writes.

“It is aimed at delivering a balance between acknowledging the initial costs of advisers and eliminating any behavioural doubt as to whether the client’s interests are being placed ahead of the adviser’s own interests.”

The LIAWG was formed in response to a damning report from ASIC last year, which found that the current commission model was leading to poor quality advice for many life insurance customers.

“It is common knowledge that cash flow is the biggest reason small businesses fail,” he says.

However, with rough calculations showing that the industry could lose $270 million in revenue in the first year of implementing the changes, many are resisting the report’s conclusions.

“Each of the AFA representatives has worked tirelessly over the last five months to demonstrate the role financial advisers and their licensees play in supporting Australians to get, and claim on, life insurance. It has been a thorough process,” he says.

“Ideally this final report would have our complete support but unfortunately, in its current form, it does not.”

Fox says the majority of life insurance advice is given by small firms.

“It is common knowledge that cash flow is the biggest reason small businesses fail,” he says.

“If advisers are to earn less than it costs them to provide financial advice, it is only a matter of time before they go out of business or stop providing this type of advice.

“The social cost to Australia of fewer people getting appropriate insurance would be enormous. We are not being alarmist – consider what it means for government funding of disability support pensions and other forms of payments and service support.”

The AFA is instead pushing for the hybrid commission model to be made standard.

Synchron Director Don Trapnell agrees that the proposed changes would force smaller operators out of business.

“The report suggests that businesses will recoup losses in a few years’ time,” he says.

“Small businesses simply cannot withstand losses for that period of time and would be forced to shed staff and cut costs simply to survive.

“If the recommendations are implemented, we estimate that job losses, both direct and indirect, suffered by Synchron practices alone would number around 500 people.”